Oil cracks $100 as Egypt violence adds to risks

We Needed an Event

I have been telling my clients that for WTI crude oil to get above $100 a barrel we would need an event. Yesterday we got two. Not only did Egypt's President act defiant against military demands to meet the protestors demand, then we had a big drop in American Petroleum Institute's supply report. The API showed-U.S. weekly crude stocks off 9.4 mln bbls -U.S. weekly gasoline stocks off 183,000 bbls weekly distillate stocks off 2.3 mln bbls . Obviously the flooding and pipeline closures impacted supply. We also had the restart of the big BP Whiting Indiana plant, a factor that will change Cushing supply.

In Egypt the situation is adding to the risk. Violence overnight is adding to the tension as Morsi says heck no, I won't go. The Suez Canal is now on high alert and there are increased risks that there may be sabotage of oil pipelines mainly the SUMED pipeline. The Energy Information Administration reminds us why oil cares. According to the EIA the Suez Canal/SUMED Pipeline strategic routes for Persian Gulf oil shipments to Europe. Closure of the Suez Canal and SUMED Pipeline would add an estimated 6,000 miles of transit around the continent of Africa.

The Suez Canal is located in Egypt, and connects the Red Sea and Gulf of Suez with the Mediterranean Sea, spanning 120 miles. In 2011, petroleum (both crude oil and refined products) and liquefied natural gas (LNG) accounted for 15 and 6 percent of Suez cargoes, measured by cargo tonnage, respectively. In 2011, 17,799 ships transited the Suez Canal from both directions, of which 20 percent were petroleum tankers and 6 percent were LNG tankers. Only 1,000 feet wide at its narrowest point, the Canal is unable to handle Ultra Large Crude Carriers (ULCC) and most fully laden Very Large Crude Carriers (VLCC) class crude oil tankers. The Suezmax was the largest ship capable of navigating through the Canal until 2010 when the Suez Canal Authority extended the depth to 66 feet to allow over 60 percent of all tankers to use the Canal, including ships that are 220,000 of dead weight tons in size.

SUMED Pipeline The 200-mile long SUMED Pipeline, or Suez-Mediterranean Pipeline, provides an alternative to the Suez Canal for those cargos too large to transit through the Canal (laden VLCCs and larger). The crude oil flows through two parallel pipelines that are 42-inches in diameter, with a total pipeline capacity of around 2.4 million bbl/d. Oil flows north through Egypt, and is carried from the Ain Sukhna onshore terminal on the Red Sea coast to its end point at the Sidi Kerir terminal on the Mediterranean. The SUMED is owned by Arab Petroleum Pipeline Co., a joint venture between the Egyptian General Petroleum Corporation (EGPC), Saudi Aramco, Abu Dhabi's National Oil Company (ADNOC), and Kuwaiti companies.

The SUMED Pipeline is the only alternative route to transport crude oil from the Red Sea to the Mediterranean if ships were unable to navigate through the Suez Canal. Closure of the Suez Canal and the SUMED Pipeline would divert oil tankers around the southern tip of Africa, the Cape of Good Hope, adding approximately 6,000 miles to transit, increasing both costs and shipping time. According to the International Energy Agency (IEA), shipping around Africa would add 15 days of transit to Europe and 8-10 days to the United States.

Fully laden VLCCs transiting toward the Suez Canal also use the SUMED Pipeline for lightering. Lightering occurs when a vessel needs to reduce its weight and draft by offloading cargo in order to enter a restrictive waterway, such as a canal. The Suez Canal is not deep enough to withstand a fully laden VLCC and, therefore, a portion of the crude is offloaded at the SUMED Pipeline at the Ain Sukhna terminal. The now partially laden VLCC then goes through the Suez Canal and picks up the portion of its crude at the other end of the pipeline, which is the Sidi Kerir terminal.

The majority of crude oil transiting the Suez Canal travels northbound, toward markets in the Mediterranean and North America. Northbound canal flows averaged approximately 535,000 bbl/d of crude oil in 2011. The SUMED Pipeline accounted for about 1.7 million bbl/d of crude oil flows from the Red Sea to the Mediterranean over that same period. Combined, these two transit points were responsible for nearly 2.2 million bbl/d of crude oil flows into the Mediterranean. Northbound crude transit has declined by almost half since its level in 2008 when 943,000 bbl/d of crude transited northbound through the Canal and an additional 2.1 million bbl/d of crude travelled through the SUMED to the Mediterranean. Contrarily, crude oil shipments travelling southbound through the Canal toward the Red Sea, primarily destined for Asian markets, increased from 2008 through 2010, but fell slightly in 2011. Total oil flows from the Suez Canal declined steeply by more than one-third in 2009 to about 1.8 million bbl/d, down from 2008 levels of over 2.4 million bbl/d. Crude oil flows through the SUMED experienced a much steeper drop to1.2 million bbl/d from approximately 2.1 million bbl/d over the same period. The year-over-year difference reflects the collapse in world oil market demand that began in the fourth quarter of 2008, followed by OPEC production cuts (primarily from the Persian Gulf), which caused a sharp fall in regional oil trade starting in January 2009. Drops in transit also illustrate the changing dynamics of international oil markets where Asian demand is increasing at a higher rate than European and U.S. markets, and West African crude production is meeting a greater share of the latter's demand. At the same time, piracy and security concerns around the Horn of Africa have led some exporters to travel the extra distance around South Africa to reach West African markets. Total oil flows through the Suez Canal increased year-over year to almost 2.2 million bbl/d in 2011, but still remain below previous levels prior to the global economic downturn.

Unlike oil, LNG transit through the Suez Canal has been on the rise since 2008, with the total number of laden tankers increasing from approximately 210 to over 500, and volumes of LNG traveling northbound (laden tankers) increasing nearly six-fold. Southbound LNG transit originates in Algeria and Egypt, destined for Asian markets while northbound transit is mostly from Qatar and Oman, destined for European and North American markets. The rapid growth in LNG flows over the period represents the startup of five LNG trains in Qatar in 2009-2010. The only alternate route for LNG tankers would be around Africa as there is no pipeline infrastructure to offset any Suez Canal disruptions. Countries such as the United Kingdom, Belgium, and Italy received over 80 percent their total LNG imports via the Suez Canal in 2010, while Turkey, France, and the United States had about a quarter of their LNG imports transited through the Canal.

We also have Portugal bond yields rising, a factor that could signal more rough times for Europe. Reports a plenty today could also make for some wild swings.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

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